New Delhi:India will have to exit from its expansionary fiscal and monetary policies earlier than other countries, Reserve Bank of India (RBI) governor D. Subbarao said on Tuesday. However, he held out an assurance that the soft monetary policy stance will stay in place until the central bank is convinced about economic recovery.
“The question of exit will be asked much sooner than (in) other countries. We have to take a call on supporting the recovery and stemming inflationary pressure,” Subbarao said at a seminar organized by the Indian Council of Research in International Economic Relations (Icrier).
“We will not exit until we are sure that recovery is secure,” he added.
Securing growth: RBI governor Subbarao says the central bank will have to take a call on unwinding its soft monetary policy stance. Abhijit Bhatlekar/Mint
Since October, RBI has reduced interest rates steeply and pumped liquidity into the system by slashing the cash-reserve ratio, or proportion of deposits that commercial banks have to keep with the central bank, as it countered the impact of the global financial meltdown and credit crunch. The government has announced three fiscal stimulus packages to boost domestic consumer demand since December.
While the Indian economy is showing signs of a recovery with industrial output growing above 6% for two consecutive months, drought in half the country’s districts has raised concerns about inflation and growth prospects this year.
Subbarao said RBI will look at a number of indicators such as wholesale price inflation (WPI), consumer price inflation, industrial growth, capital inflows and credit expansion while unwinding its soft monetary policy stance.
Coordination among countries is crucial in formulating a strategy to exit from the accommodative policy stance because there would be cross-border implications if some countries exited earlier than others, he said.
He added that coordination didn’t mean synchronization and each country should decide the sequencing and extent of withdrawal of its stimulus packages.
If interest rates in India go up, there may be a problem of higher capital inflows leading to excess liquidity, Subbarao said. “We will keep that dillemma in mind while deciding the exit strategy,” he said.
Terming the current negative WPI a “statistical artifact”, Subbarao said WPI inflation in the first five months (April-August) of the fiscal was 5.2% and it would certainly exceed that by end of the fiscal.